How I Lost 100k with Real Estate
In 2016 I was in School finishing my master’s degree. I have been a very conservative real estate investor and the houses I bought don’t go for over $53k. In some states like PA you can get a home from 10k to any amount. When houses go for such a low price, there is a catch. You can find houses at a low price in low income and low population areas. On the surface it looks very good. If you buy a $20k house and rent for $550 with yearly taxes under $1000 you think you’ll make a killing, over 15% cap rate is great. However, when you are dealing with low cash flow and repairs, there is no more cash flow. If your furnace runs out you will pay around $5k to $10k to get a new one and a new roof costs between $3k -$7k. That being said if I make $300 monthly, it will take me a couple of years to recover that money. Sure, I have some reserves but homes eat reserves pretty quickly. Another issue with properties in low income neighborhoods is that their value hardly goes up. I bought a house for $16k and a few years after I sold it for $20K. There is no profit with those numbers.
Now, how I lost $100k: I bought 4 houses for $12k, all in need of repairs. I thought it was a great deal. I was so wrong.
House number one: The person who lived there never left, and I had to evict him. During the eviction the judge went on vacation and it took me a couple of months to evict. In PA, evictions are rather quick if the judge is not on vacation. It was incredible how the guy was living; filthy house, left a lot of trash and even some walls were open. It took me around $27k to fix the house, new roof, new floors, new electric panel, bathroom remodel, paint, dumpsters, then when I finally finished and put it up, it wouldn’t rent. So after several months somebody rented it way under its value and I was making around $100 cash flow that would be spent quickly on repairs. I was renting on negative most of the time. I sold the house for 3k to a friend of the tenant just to get rid of it because it needed more repairs and I was not willing to spend more money.
House number two: This house didn’t look so bad, but it was. I repaired the roof thrice and it cost me over $10k, new plumbing cost around $4k, new floors, new stairs for the backyard and front, paint, new furnace for $8k, new drywall in the kitchen, new ceiling tiles, new bathroom and several dumpsters. This added up to about $35k. After several months of the house being up for rent, somebody rented it for less than the market price. The tenant let the furnace run out of oil several times and repairs were costly. I was cash flowing around $300 but the tenant left shortly after he rented and I was unable to rent it again. The roof started leaking and the furnace needed repairs. I sold it for $6k, taking another loss but gaining much needed piece of mind.
House number three: the house was gorgeous when it was habitable. It had 5 bedrooms, finished basement, 2 bathrooms, a beautiful backyard and beautiful deck.
The tenants left absolutely everything they owned at this house and it took 5 dumpsters and several people to empty the house. The roof was leaking and the borough sent me a notice about a fine if I didn’t fix the roof, whose repair was $5k. The dumpster and clean out was about $4,500 and maintenance and taxes was around $4k. So I bought materials to start fixing and paid somebody to do electricity for $5k. I was unable to be there to supervise their work, so basically they didn’t do much and pocketed the cash. I sold the house for $1,800 to just get rid of it.
House number four: The house was in an alley and needed complete rehab. I didn’t do anything to the house except pay taxes for 2 years that amounted to $1,600 and even did the yard myself. The handyman stored all his materials in the house. So, I told him that I’d give him the house but he didn’t have any money; I paid $700 just to get rid of the house. I even covered all closing costs.
It is extremely difficult to find people to work in small towns. I’d see somebody doing some work in a home in the town and I’d stop and ask for their information. The cost in small towns for repairs are similar or more than in any big city.
I’m now getting coached by a real estate investor and mortgage broker and I’m changing my strategy and market. Maybe I lost $100k but the knowledge and experience that I acquired was invaluable. Now I am not afraid of doing things in others markets, because if I survived all I went through, I can do anything.